What are the main functions of capital markets? How useful are they as a source of finance?

Résumé du document

Capital markets have two important functions: primary market and secondary market. The primary market provides new capital. It is mostly considered as a source of finance for companies which want to raise capital in order to finance their development or acquisitions. The second function of capital markets is the secondary market. Existing shares are traded and shareholders can dispose of their holdings when they want.

The primary market is dependent on the efficiency of the secondary market. Indeed, if the secondary market is not effective enough, investors fear to fell "locked in", and do not invest during IPOs. Liquidity in the secondary market must be effective enough to enable investors to sell their holdings.

The main function of the secondary market is to price assets. In the efficient markets theory, capital markets reflect all the available information for the shareholders. In other words, capital markets are a mean of firm valuation. The stock price reflects the value of the company.

Extraits

[...] Is the primary market the main function of capital markets? In fact, a company can choose it's financing between equity and debt. Moreover, some large companies are not listed and do not have difficulties raising capital to finance their development project. Indeed, the larger mean of financing for companies is debt. Most of the time, companies choose debt to finance their activities and do go public The secondary market: a firm valuation? The secondary market permits investors to execute transactions among themselves; they can easily sell their holdings to other investors. [...]

[...] What are the main functions of capital markets? How useful are they as a source of finance? Capital markets have two important functions: primary market and secondary market. The primary market provides new capital. It is mostly considered as a source of finance for companies which want to raise capital in order to finance their development or acquisitions. The second function of capital markets is the secondary market. Existing shares are traded and shareholders can dispose of their holdings when they want. [...]

[...] To conclude, the main function of capital markets is to price shares. What could be the price of a share if you could not sell it? Once a firm is public (IPO, primary market), share are priced on the stock market. According to the EMH, share prices reflect quickie and correctly all the available information. Fundamental Analyst plays an important role in markets efficiency. Information to investors is a key requirement. That is the reason why going public requires a lot of information. [...]

[...] The first function of capital markets is to be a source of finance for companies. To raise money, companies often use capital markets. Capital markets are a source of finance when a company wants to develop its activities. This role of capital markets is similar to the debt capital market. A company can choose between debt towards banks and debt towards shareholders. In fact, companies try to diversify their financing. When a company wants to raise capital for the first time in capital markets, it has to organize an IPO. [...]

[...] They compare their valuation with the current market price and, if they think that the shares are worth more than the current market price, advice are given. These analysts provides to the market efficiency because they give very wide information to investors. Finally, share prices seem to reflect all the available information and anticipate some of future information. For example, share prices anticipate the level of profits or dividends that will be officially given in the next months by the company's management. [...]